Tax rules at every stage of homeownership: Buying, Owning, and Selling

Buying a home is an aspiration for so many people, representing both a financial commitment and a personal milestone. However, the journey from purchasing to owning and eventually selling a property comes with several tax implications that can often be overlooked.

In this article, we’ll break down the key tax considerations at each stage—buying, owning, and selling—so you can make an informed decision.

At the time of the purchase of the house

Purchase from resident Indian

In case the house property is purchased from a tax resident of India, the buyer must, at the time of payment of the agreed amount (consideration), deduct income tax at the rate of 1% of such consideration or the stamp duty value of such property, whichever is higher. However, this is applicable only if the consideration or the stamp duty value of such property is Rs 50,00,000 or more. The amount of taxes deducted shall be deposited by the purchaser to the income tax authorities through challan-cum-statement (Form 26QB) within 30 days from the end of the month in which the taxes were deducted.

The purchaser is not required to obtain a Tax Deduction and Collection Account Number (“TAN”) in such cases and only the Permanent Account Number (“PAN”) of the purchaser and the seller is required. The purchaser shall also furnish a certificate of tax deduction in Form 16B to the seller within 45 days from the end of the month in which the taxes were deducted (this is generally available for download within 12-15 days post-filing of Form 26QB).

Purchase from non-resident Indian (NRI)

In case the house property is purchased from an NRI, the purchaser shall deduct income tax at the rate of 12.5% (plus applicable surcharge and cess) in case of a property that has been held for more than 24 months by the NRI and at the applicable slab rate, typically 30% (plus applicable surcharge and cess) in case of a property that has been held for 24 months or less.

It is important to note that the threshold of Rs 50,00,000 is not applicable for property purchases from non-residents. The purchaser should obtain a TAN. The taxes deducted shall be deposited with the income tax authorities by 7^th of the month following the month in which the taxes were deducted, except for March (in case the taxes were deducted in March, the due date for deposit of taxes is 30^th of April). Further, the purchaser shall file the e-TDS return in Form 27Q within the applicable timeline provided below for each quarter:

 

Quarter	Due date
Q1 – April to June	31st July
Q2 – July to September	31st October
Q3 – October to December	31st January
Q4 – January to March	31st May

 

The purchaser needs to issue a certificate of tax deducted at source in Form 16A to the NRI seller within 15 days of the due date of filing the e-TDS return.

In terms of Section 195(1) of the Income Tax Act, 1961 (“Act”), such deduction of taxes (from payment made to NRI) is required to be carried out on the sum chargeable to tax (i.e., on the capital gains earned by the seller). However, the practice that is generally followed in the industry is to consider deducting taxes on the sale consideration being paid to the NRI – this is because it may not be practically possible for the purchaser to estimate the capital gains of the seller. One should carefully discuss the issue with their tax advisor and accordingly take a position in relation to the same.

Obtaining a lower withholding tax certificate

If the actual tax applicable to the NRI seller is lower/NIL (due to minimum / NIL capital gains), he/she may approach the tax authorities to obtain a lower withholding tax certificate under Section 197 of the Act. If such a certificate is issued to the NRI seller by the tax authorities, the purchaser shall deduct tax at the rates specified in such certificate or deduct no tax, as the case may be.

Stamp duty on purchase of property

One must also check for the applicable stamp duty and registration charges as per the local/state requirements. The purchaser must pay the stamp duty and registration charges to legally register the purchase/transfer of property in Government records.

At the time of holding/putting to use the house property

If the homeowner decides to rent out his/her house property, the rental income that he/she receives is taxable, subject to certain deductions. 

The calculation of income starts with something termed as ‘Gross annual value.’ GAV for the purpose of computing house property income is higher of the actual rent received or receivable and reasonable expected rent from the property. The annual property tax (municipal tax) paid by the owner is allowed as a deduction in the year of payment from the GAV to arrive at the net annual value (“NAV”) of the property. From this NAV, the following deductions can be claimed for a let-out property (rented property):

• Standard deduction of 30% of the NAV; and
• In case the property is acquired on the mortgage, the amount of any interest payable on such loan during the tax year.

Where the property is self-occupied*, the interest paid on the mortgage can be claimed as a deduction under the old tax regime, subject to a threshold of Rs 2,00,000 per annum. No other deduction (e.g., standard deduction, etc.) is allowed from self-occupied house property. According to the income tax laws, only up to two houses are considered self-occupied*. That means if one owns three houses, and even if all are self-occupied, he/she is obliged to show ‘deemed income’ from at least one house property of his/ her choice.

*Where the property consists of a house or part of a house which-
(a)is in the occupation of the owner for the purposes of his own residence; or
(b)cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil.

It is important to note that the taxation of income from house property under the new tax regime/ concessional tax regime is slightly different owing to certain restrictions like claim of interest deductions, set-off of losses, etc. This is explained by way of the example below:

                                                                                                                                 (Amount in INR)

Particulars	Let-out property		Self-occupied house property
	Old regime	New tax regime	Old regime	New tax regime
GAV (Higher of actual rent and expected rent)	10,50,000	10,50,000	NIL	NIL
Less: Municipal taxes paid during the year	(50,000)	(50,000)	NIL	NIL
NAV	10,00,000	10,00,000	NIL	NIL
Less: Standard Deduction @30% of NAV	(3,00,000)	(3,00,000)	NIL	NIL
Less: Interest on mortgage	(10,00,000)	(10,00,000)	(2,00,000)*	NIL
Loss for the purpose of set-off/carry-forward	– 3,00,000	-3,00,000	-2,00,000	NIL
If income is earned from another house property in the same year, can the above loss be set off against it?	Yes	Yes	Yes	NA
Is current-year house property loss allowed to be set off against other heads of income?	Yes (restricted to Rs 2 lk)	No	Yes	NA
can unadjusted loss be carried forward to future years to be set off against income from house property?	Yes, for 8 years	No	Yes, for 8 years	NA

*For self-occupied property, interest on loan deduction is restricted to Rs 2 lakh per annum. Please note that there are certain tax withholding compliances on the rent paid by the tenant to the landlord. Such compliances (as applicable) are to be discharged by the tenant, and the rate of taxes to be deducted depends on the residential status of the landlord and the amount of rent paid. The landlord while computing his / her income and taxes, shall avail credit of such taxes deducted (if any) by the tenant.

At the time of the sale of the house

Capital gains on the sale of house property are computed by reducing the cost of acquisition, the cost of improvement (incurred on or after 1 April 2001), and the expenditure incurred wholly and exclusively in connection with the transfer of the property from the sales consideration. In the case of properties acquired prior to 1 April 2001, the fair market value (‘FMV’) or the stamp duty ready reckoner value as of 1 April 2001, if available, whichever is lower, can be considered as the cost of acquisition. The FMV or registered stamp duty value (whichever is lower) will be considered only if it is higher than the actual cost of acquisition and/or improvement till 1 April 2001.

While the short-term capital gains (i.e., gains on sale of properties held up to 24 months) are taxed as per the applicable slab rates, the long-term capital gains (i.e., gains on sale of properties held for more than 24 months) are taxed at 12.5% without the benefit of indexation / 20% with indexation benefit in certain cases (depending on when the property was acquired/sold and the residential status of the seller). This is explained by way of the below example:

Long-term capital gains on the sale of house property in the hands of the resident seller:

(Amount in INR)

Particulars	Property acquired before 23 July 2024			Property acquired on or after 23 July 2024
		Sold before 23 July 2024	Sold on or after 23 July 2024
Sale consideration	A	1,00,00,000	1,00,00,000	2,00,00,000
Cost of acquisition	B	50,00,000	50,00,000	1,00,00,000
Indexed cost of acquisition*	C	71,45,670	71,45,670	NA
Capital gains (without indexation)	D = A-B	NA	50,00,000	1,00,00,000
Capital gains (with indexation)	E = A-C	28,54,330	28,54,330	NA
Tax @ 12.5% without indexation	F	NA	6,25,000	12,50,000
Tax @ 20% with indexation	G	5,70,866	5,70,866	NA
Ultimate tax liability	Lower of F or G (for resident)	5,70,866	5,70,866	12,50,000
Capital gains to be reported in the tax return**		28,54,330	50,00,000	1,00,00,000
Will the ultimate tax liability change in case the seller is NRI?		No	Yes (the tax liability will be 6,25,000 for NRI)	No

Applicable surcharge and cess to be added

* Indexation applied by using the Cost Inflation Index (‘CII’) of the tax year 2024-25 over the tax year 2015-16 (i.e., 363/254)

**Depending on how the income tax return form is amended, the capital gains may need to be reported with and without the indexation benefit in the ITR form. The tax payment will, however, be computed as per the table above.

As evident from the table above, the benefit of cost indexation on the sale of house properties is only available to resident individuals and HUFs and not available to NRIs. Further, such cost indexation benefit is available only for house properties (house or building or both) purchased prior to 23 July 2024. The benefit is not available for any other long-term capital assets (e.g., gold, shares, securities, etc.). Also, it is important to note that in case there is a long-term capital loss due to the indexed cost of acquisition being higher than the sale consideration, such capital loss will not be allowed to be set off against capital gains and also will not be allowed to be carried forward (though for the purpose of calculation of taxes, the indexation benefit will be considered). This is explained by way of the example below in the case of a resident individual selling house property on or after 23 July 2024:

 

Sale consideration (A)	100
Cost of acquisition (B)	60
Indexed cost of acquisition (C)	120
Long term capital gains with indexation benefit (A-C)	(20)
Long-term capital gains without indexation benefit (A-B)	40
Tax @ 20% with indexation (D)	NIL
Tax @ 12.5% without indexation (40*12.5%) (E)	5
Ultimate tax liability (Lower of D or E)	NIL
Whether the capital loss of INR 20 computed with indexation benefit is allowed to be set-off against capital gains / carried forward?	No

 

Uday Bhartia, Senior tax professional, also contributed to the article. The views and opinions expressed in this blog are those of the authors. All content provided is for informational purposes only and should not be taken as professional advice.